Opening Markets and Keeping Them Open: A Contract and Antitrust Model Ray Gifford, Chairman Colorado Public Utilities Commission

Opening Markets Eliminate entry and exit barriers Deregulate retail prices –Correct price signals imperative to development of competitive market Enforce interconnection and unbundling requirements of 1996 Telecom Act Rationalize wholesale and retail pricing

Contract Rights Interconnection Agreement –subject to traditional contract analysis –Commission must have full remedial authority to discourage breach Intercarrier compensation must be efficient –Access Charges--Paid by interexchange carriers to carriers for originating and terminating calls, (25), (28), C.R.S. –Reciprocal compensation--required by 47 U.S.C. 252(d)(2) for local calls

Getting it Wrong Access Above cost for local loop cost support –Promotes recovery of fixed cost through usage- sensitive charge Cross-subsidy from toll users to local users Incorrect price signals distorts market development –underpayment for fixed costs; overpayment for variable costs

Getting More Wrong Recip Comp To the extent cost-based, makes sense following a cost causation model Inherent difficulties of pricing correctly –Commission can unintentionally create opportunity for regulatory arbitrage ISP Recip Comp Distorts business plans –artificial inducement to acquire only terminating traffic –disincentive to enter residential market Cross-subsidy –from ratepayers to ISPs, their customers and ISP CLECs Facsimile of real competition –not consumer welfare enhancing

Getting It Right--Model 1 Truly cost-based pricing –Three-phase pricing for access and recip comp phases: set-up, capacity, usage-sensitive BUT –impossibility of getting the price right –information cost (metering and billing) is not 0, and is dead weight loss –regulatory caprice and temptation –requires rate rebalancing

Getting It Right--Model 2 Universal “bill and keep” for access and recip comp –ease of administration –forces Commissions toward second best efficiency for retail pricing Bill and keep assumes –very small short run and long run costs for traffic termination and origination on modern network –information cost of metering traffic is dead weight loss Would allow carriers to negotiate other arrangements and rates BUT –systematic undercompensation of carriers in access and recip comp –forces retail rate rebalancing

Antitrust Monitor Now Commission oriented to regulating monopolies –certification –operating areas –tariffing –price regulation – provider of last resort –universal service Absent legislative command, none of these roles is warranted in a competitive market

State as Mini-FTC search and mitigate residual market power –FCC should go no further on UNEs and pricing than antitrust “essential facilities” doctrine would warrant Intervention and regulation of telecommunications market must be warranted based on established antitrust principles Costs of regulatory intervention must exceed consumer welfare loss from persisting market power

Carrier Dispute Forum Specialized, rapid and expert resolution of disputes between carriers –full panoply of contract and antitrust remedies Alternatives –courts, private arbitration –less fear of capture or systematic bias, but less expertise and slower

Consumer Ombudsman Rapid, decisive and punitive actions against carriers committing consumer fraud Monitor, mediate and aggregate consumer claims against carrier Enforce quality of service standards for captive customers

The Goals Commission’s role recedes to that of referee instead of prescriptive bully Proper price signals for consumer welfare enhancing--not producer allocating-- competition Get Commission out of the pricing business absent market power problem Commission stops saying “maybe,” but gives yes or no answers so business plans can be made.